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9 Success Factors for Improving Your Efficiency Ratio and Profitability

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Bill Waid, Chief Product and Technology Officer for FICO, shares how a platform approach to decisions can be critical to the success of a bank’s digital transformation

 

All banks now have digital transformation programmes in place, and many have several initiatives underway. However, not all of these programmes are on track to improve bank profitability: In fact, on an aggregate basis, industry experts at McKinsey, Boston Consulting Group, Ernst & Young, KPMG and Bain & Company collectively found that the success rate is in the 20-30% range Banks need to measure their success to ensure they are heading towards the necessary payoff, and that begins with setting a target for improved efficiency ratios.

An industry-accepted calculation, efficiency ratio scores a bank’s profitability and is an important measure of financial stability. The goal is to have a low score, which indicates that a bank is spending less to generate every dollar of income. Efficiency ratios are calculated by dividing bank expenses by net revenues, and a ratio of under 50 is optimal indicating that every US$1 of expenses results in US$2 of revenue.

As an example, a bank with a net revenue of US$100m and expenses of US$65m, has a 65% efficiency ratio: US$65m/US$100m = 0.65 = 65%

65% is a good — but not great — efficiency ratio. I would encourage a bank with a score like that to use their in-house data to focus on more efficient customer service and retention strategies, such as offering new financial products, cross-selling and up-selling efforts focused on existing customers, which can be done at a dramatically lower cost than new customer acquisition programmes, which can be five times greater than retention programmes

Nine Success Factors that Help Drive Efficiency Ratios Lower

Having an end-goal like improving your efficiency ratio is important, but to meet that kind of target you have to understand how a digital transformation program can make this happen. How can you set up more specific objectives to guide your work and measure your progress?

In FICO’s experience with banks around the world, we have found nine success factors for digital transformation projects that address business goals.

  • Driving additional lending and improved risk management through enhanced decisioning using previously siloed customer and product data across division. Emphasis is on revenue generation, with customer retention, profit per customer and lending per customer improved.
  • Driving down long-term structural IT costs using cloud innovation and more flexible technology solutions. Emphasis is on cost control, improving income ratios and cutting costs per account and per application.
  • Quickly assessing and seizing strategic and tactical opportunities, pivoting initiatives where necessary in an increasingly volatile economic climate. Emphasis on revenue generation and cost control, with the speed of change increasing speed and the cost decreasing.
  • Reducing losses through next-generation collections and recovery capabilities. Emphasis on cost control, with improved customer outcomes, increased capacity and take-up rates alongside decreased charge-offs and agent call times.
  • Improving the customer experience by delivering targeted omnichannel communications and AI-informed customer relationship management (CRM)/next best action. Emphasis on revenue generation and cost control, with increased customer engagement scores, reduced costs to service accounts and reduced attrition.
  • Rapidly deploying analytic advancements using new data sources. Emphasis on revenue generation, cost control and compliance, with new models and strategies deployed and effective marketing employed.
  • Moving important decisions to real time, including the continuous evaluation of customer exposure. Emphasis on revenue generation and cost control, with increased profitability per customer and reduced cost to serve.
  • Maintaining regulatory compliance through a customer-level view of decisions, preferences and responses. Emphasis on compliance, reducing the cost of governance and reputational risk, and reducing regulatory penalties.
  • Adopting enterprise fraud management, minimising the cost and negative customer experience of multichannel fraud patterns like account takeover (ATO). Emphasis on revenue generation, cost control and compliance, reducing credit and operational losses.

The focus here is on digital transformation that directly impacts everyday customer interactions, such that every decision you take drives your strategic outcomes. To do this means moving beyond today’s legacy systems, which perpetuate a fragmented, poorly managed customer experience, and generate slow and sub-optimal decisions with increased requirements to maintain data across multiple platforms. What’s needed is a single decision management platform, which enables real-time data streaming and connected, centralised decisioning.

Within a cloud-based platform, upgrading data is simple and inexpensive and new data sources can be easily absorbed into the decisioning framework. Such a platform also moves control of change from IT to the business, enabling cheaper, faster response to changing market conditions. The shift to a digital-first, 365 × 24 × 7 model for consumers to interact with the bank becomes easier, meaning banks can quickly meet customers’ changing expectations and requirements.

An enterprise decisioning platform revolutionises how organisations automate the process of making decisions and applying intelligence across the customer lifecycle. The FICO platform provides an open architecture and an integrated set of composable capabilities that span the applied intelligence value chain — from organising your data, to discovering deep new insights, putting this into motion with actions to achieve the desired outcomes.

Finance

How technology can help win the war on financial crime

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By Andrew Doyle, CEO of AML compliance software, NorthRow

 

Financial crime is on the rise and the stats are alarming. In the UK alone, 64 percent of businesses (according to data from the Global Economic Crime Survey) have experienced fraud, corruption or other incidents of financial crime within the last 24 months, while ONS stats show there were 3.7 million incidents of fraud in England and Wales in the year ending December 2022.

So it’s no surprise that financial institutions and other regulated firms are under increasing pressure from regulators (and the ever-evolving legislation they must adhere to) in the battle against dirty money. Regulators are imposing crippling fines for any compliance breaches, not to mention the significant reputational damage that comes with non-compliance.

Historically, financial firms have employed large numbers of staff to combat money laundering, but regulators are now expecting to see digital solutions in place to counter the risk of financial fraud, and with good reason. Technology can be the deciding factor in the war on financial crime and here’s why:

Better risk detection

Technology platforms can analyse historical data to predict potential incidents of money laundering, enabling organisations to take preventive measures, while also identifying unusual patterns or changes in customer risk profiles, which may also indicate suspicious activity.

Advanced analytics can help companies identify complex patterns across large datasets, making it easier to detect networks of fraud. It is also possible to assign risk scores to transactions or entities based on their likelihood of being associated with money laundering. This helps in prioritising high-risk cases for investigation.

Andrew Doyle

Enhanced customer due diligence

Automated software platforms can analyse customer information, public records, and other data sources to perform thorough due diligence on clients, identifying potential risks or suspicious behaviour before they are signed up.

RegTech automates the process of verifying customer identities and conducting enhanced due diligence on individuals and on companies, ensuring compliance with Know Your Customer (KYC) and Know Your Business (KYB) regulations, both vital components of anti-money laundering efforts.

More accurate identity verification

Biometric verification is a powerful tool in enhancing anti-money laundering and fraud detection. It involves using unique physical or behavioural characteristics of an individual to verify their identity. Traits like fingerprints, facial features, iris patterns, and voiceprints are unique to each individual and are nearly impossible to replicate or forge. This makes them highly reliable for verifying that clients are who they say they are.

Biometric verification can also reduce the number of false positives in fraud detection by providing a highly accurate means of confirming the identity of a customer. This leads to more reliable results and lessens the need for manual intervention.

Continuous and real-time monitoring

Real-time alerts allow for immediate action when suspicious activity is detected. This can prevent or minimise potential financial losses and damage to a company’s reputation. By identifying and acting upon suspicious activities in real-time, financial institutions can reduce the risk of financial losses associated with incidents of economic crime.

Continuous monitoring with real-time alerts can also help refine the accuracy of anti-money laundering systems over time. This reduces the number of false alerts and decreases the need for manual intervention.

To the future

According to data from Capgemini, 68 percent of UK institutions are already looking into real-time anti money laundering monitoring systems to stay ahead of potential threats while 86 percent, says Refinitiv, agree that innovative digital technologies have helped them identify financial crime.

So the data tells us that companies are already heading in the right direction when it comes to fighting fraud, but as the landscape of financial crime continues to evolve, financial firms must ensure they do the same.

By leveraging the right technology, businesses can ensure they not only meet regulatory requirements and safeguard their operations, but also protect their reputations and crucially, maintain that all important customer trust.

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Finance

In 2024, payments will evolve to broaden accessibility

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Attributed to Roy Aston, COO at Paysafe.

 

As we look to 2024 and beyond, businesses will need to adapt experiences to changing consumer needs and demands, working with payments providers to increase accessibility, offer broader choice, and more.

We break down some the forces driving evolution in payments over the coming years.

Payments need to be available to everyone, everywhere

Regardless of their location or situation, consumers do not want to wait when it comes to payments. The proliferation of smart devices has given users access to everything, all at once, and this is also expected when making transactions.

In 2024, banks and financial institutions will continue to push ahead with this journey to offer smooth, secure payments to everyone, everywhere, delivering services at the lowest possible barrier to entry. This also means ensuring consumers, even those that are unbanked or underbanked, have access to remittances and cross-border payments.

The first step in achieving this goal will be to improve reliability, security and availability, which may see traditional payment methods like debit and credit cards – still the most popular payment methods – become less dominant, while alternative payment methods (APM) like eCash and digital wallets will grow.

This is because, with the right payment provider, merchants can ensure these APMs are available anywhere in the world – eCash, for example, does not require a bank account to use. In addition, digital wallets and online cash can offer swift, secure transactions, helping users overcome security issues by not requiring them to enter their financial details.

Financial companies will embrace collaboration in 2024

While businesses can address consumer payment concerns using APMs, they must also look to bolster their own defences as the threat landscape changes. Increasingly advanced technology, like AI models, are now accessible to far more people, including threat actors.

To combat this escalating threat, it’ll be no surprise to see more financial companies collaborate in 2024 as they seek to improve cyber risk mitigation. This makes perfect sense – and would be a positive step for the industry – though it is easier said than done.

Businesses must share data legally, while aimed toward a positive purpose, rather than for pure profit. For example, if a financial organisation gains intelligence on a cyber group, they could share this with other companies to protect against bad money movement.

Ideally, collaboration could help improve anti-fraud, anti-money laundering, and cyber security measures, and more broadly reduce risk for businesses and consumers alike. But first, thinking around data governance may need to change.

Existing trends will evolve

While exciting new trends will emerge in 2024, we’ll also see the evolution of some that have yet to reach their full potential.

Embedded payments, for example, will continue to develop, with more businesses bringing together financial products with features like loyalty schemes to offer more added value to consumers.

Decentralised finance, too, should continue to build momentum in 2024. While decentralised finance, and specifically NFTs, have faced challenges this past year, it will be no surprise to see companies get to grips with changing regulatory requirements and continue to build in this area.

Open banking could also see a big 2024, with more APIs becoming available, and companies starting to develop new solutions to enhance customer experience and reduce friction in the payment ecosystem.

And while evolution rather than revolution is a necessity in technology, it’s always exciting to look ahead to the big trends that could shape the future – perhaps not in the year ahead, but beyond.

The future is quantum

Quantum computing is a trend that is as exciting as it is potentially frightening. Able to perform computations that are exponentially faster than ever before, quantum computing represents a new frontier and it will be thrilling to see how it is used in the years ahead.

Combined with AI, for example, quantum computing could optimise processes at a speed and scale never seen before – with serious benefits passed onto consumers.

In the nearer term, however, ensuring payments are available and accessible for everyone must remain the focus in 2024.

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